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Alfonso Peccatiello: The Fed Put Is Back, Bull Steepener Base Case
Forward Guidance
Analysis of Nominal GDP Growth, Federal Reserve's Reaction, and Market Impacts
Nominal GDP growth disappointment could lead to a new Fed put, causing a positive reaction in stock markets despite the economic growth disappointment. During periods when the U.S. faced nominal growth disappointments without a recession, the Federal Reserve's dovish reaction function historically benefitted stocks the most due to the removal of uncertainties and the Fed's proactive interest rate cuts. This scenario led to better stock market performance than expected with an acceptable level of GDP growth and inflation. On the bond side, a deterioration in nominal growth along with proactive interest rate cuts by the Fed could result in a steeper yield curve, supporting long-term inflation and growth. This situation may mimic the macro asset class scenario observed in 2019.
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